We work hard to build up our pensions for a secure and enjoyable retirement, to be able to do all those things we did not have time for before, and have peace of mind about our future.
While our pensions feel like our money, money we set aside for retirement, they are still liable to income and other taxes.
And if you are living in France with a UK pension, you have tax considerations in both countries.
Here I look at just a few of the issues you need to be aware of.
Read more: How much money do you need for a ‘decent life’ in France?
Read more: Eight tips to get retirement in France off to a flying financial start
How UK pension income is taxed in France
Pension income from UK funds is generally taxable only in France, after a 10% deduction (maximum €4,123 per couple), at the scale rates of income tax.
These currently range from 11% for income over €10,778, to 45% for income over €168,994.
France additionally applies 9.1% social charges (reduced to 7.4% for low pension income) but Form S1 holders are exempt.
Income from UK government service pensions is taxable in the UK (and not France).
You include it on your French income tax return, but receive a credit equal to the French tax and social charges.
Lump sums
This is one tax trap that many Britons moving to France fall into.
The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax- free.
However, if you take this lump sum after becoming resident in France, it will be liable to French income tax (up to 45%, remember) and potentially social charges.
If you have not left the UK yet, you will want to think about this now.
If, however, you are considering taking your entire pension as one lump sum, in certain circumstances you may be eligible for a fixed 7.5% income tax rate in France.
This can present opportunities to re-invest the capital into a tax-efficient arrangement in France and pay less tax overall.
However, first carefully consider if such a move would be suitable and safe for you.
Read more: Five tips to enjoy a long and financially secure retirement in France
UK taxation
The UK has frozen income tax thresholds until 2028.
Therefore, if you are paying UK income tax on your pensions, it is likely that more and more tax will be taken over the next five years.
The pensions lifetime allowance is also frozen at £1,073,100 until 2028, so more people may be caught out each year.
It may sound like a high limit, but you might be surprised at how close you could get to it.
Let us say your combined pensions are worth £800,000 today, bearing in mind that defined benefits (final salary) pensions are usually multiplied by 20 to calculate the capital value.
If their values increased at a compound 5% over five years, you would be on the verge of being hit by the lifetime allowance charge: 55% on lump sums and 25% if taken as income.
And these tax charges are in addition to income tax.
You might want to take action now to prevent paying these charges in future.
UK tax changes ahead?
The Institute for Fiscal Studies (IFS), a UK economic think tank, has published a controversial report recommending that UK pensions should be liable to income and inheritance tax when the scheme member dies.
Currently, pensions escape UK inheritance tax, and income tax is not payable when the holder dies before the age of 75.
The IFS is calling for basic rate income tax to be applied to the remaining pension funds on death regardless of age – which would generate a new source of income for the government – and for the pension to be included in the value of the estate for inheritance tax purposes.
It estimates that applying inheritance tax to pensions could raise £1.9billion of revenue for the exchequer (though it does suggest this could be used to reduce the overall inheritance tax rate from 40% to 30%).
Whether the IFS proposals are accepted or ignored, this highlights the fact there is £3trillion sitting in UK money purchase pensions and a potential target for HM Treasury.
If you have left the UK permanently, do you want to leave such a valuable asset at the mercy of the UK government?
Moving your pension out of the UK now could protect you from future costly tax reforms.
As always, though, take regulated personalised advice to ensure you do not put your retirement savings at risk.
Read more: ‘Inheritance taxes are a minefield to be navigated in France and UK’
Reviewing your pension arrangements
If you are a resident of France and have a UK pension, you do need to review your arrangements and establish what is best for your current and future circumstances.
Pensions are not always set in stone.
Like you, they might benefit from moving abroad, and you need to regularly review your objectives.
That could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
Far too often, pension decisions are taken in isolation, based on options provided by UK pension companies that are oblivious to your needs and the tax implications of living in France.
Take personalised advice from a specialist who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning covering both countries.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon Blevins Franks understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
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